China housing bubble: When will it burst?

Beijing has unveiled a set of measures to cool the frenzy, but the policy moves can only go so far in terms of yielding the desired results.

China’s housing prices started to take off since 2010. First-tier cities witnessed a cumulative price gain of 128 percent between mid-2010 and September this year, representing an annual rally of 14 percent.

A closer looks shows the pace of price gain has been accelerating over past few years.

Using the ratio of housing value to gross domestic product, one common gauge to assess whether a country’s property market is bubbly, China is now at a figure of 3.27, surpassing Japan’s level of 3.7 when its property bubble burst in the 90s.

That ratio reached 3.04 in 1997 before Hong Kong’s property market tanked and it was 1.75 in 2006 shortly before subprime crisis hit America.

China’s surging property prices have a lot to do with the nation’s easy monetary policy.

The mainland’s non-financial sector debt to GDP ratio soared from 1.17 in late 2008 to 2.1 in the first quarter of this year. It reflects the fact that credit expansion has far exceeded economic growth.

The debt ratio is coming close to the peak of 2.2 in Japan when it suffered credit bubble in 1990s.

Easy money prompted many to bet on properties, as there are few other investment options and given that the domestic equity market fell out of favor after last year’s crash.

Beijing has shown no intention of tightening credit in the near term, given its reliance on that to spur economic growth. That means China’s housing market could resume the uptrend again after this around of consolidation.

So, when is the bubble going to burst?

To answer that question, I apply the Log Periodic Power Law (LPPL), a model created by economist Didier Sornette to predict financial market crash, to the China property market.

The model gained a lot of attention as it worked well in detecting a financial bubble and predicting when it will end, such as the A-share market collapse in October 2007.

After feeding in the housing price data of 30 major cities in China into the model, it indicates the reversal point could be between June 2018 and March 2019. We may either see a slump or at least a sustained decline of home prices by then.

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